ALI MOORE: The future of one of Australia's biggest hedge funds remains in doubt tonight with up to $1 billion at risk.

Basis Capital could be the first local victim of the fallout from the US subprime mortgage market.

The hedge fund is in trouble because it invests in high-risk products, linked to American home borrowers with poor credit histories.

Neal Woolrich reports.

NEAL WOOLRICH: Basis Capital's website promises transparency and double digit returns. But right now investors in the hedge fund are getting neither. Speculation is mounting that Basis is about to fold.

But industry watchers say it's impossible to tell exactly what the fund's financial position is.

JOHN KAVANAGH, THE SHEET: There's probably three or four people in the whole country who knew exactly how Basis invested its money. And that shouldn't be.

NEAL WOOLRICH: The Sheet's John Kavanagh has been following Basis Capital's fortunes.

He says Basis advised investors last week that it had suffered a 14 per cent loss in the Basis yield fund during the month of June.

JOHN KAVANAGH: Now that was the first information that anyone had that there was a problem, and within, it's only been a few days since then, less than a week, that we've seen it get into a situation of default and what looks like a wind-up in progress.

NEAL WOOLRICH: John Kavanagh says Basis Capital's top 20 unit holders are largely nominee companies. But in recent time it may have attracted small retail investors. Last night, Basis informed unit holders that it was in default on an unspecified number of loans.

It's now appointed the accounting firm, Grant Thornton, to achieve an orderly disposal of assets, which Basis says might only return 50 cents in the dollar.

JOHN KAVANAGH: The group overall manages about $2.2 billion of hedge funds, that's in two funds. The fund we're talking about, the basis yield fund is about a billion dollar fund.

NEAL WOOLRICH: Basis could be the first local victim from the problems in the United States subprime mortgage market.

Citigroup and JPMorgan have started selling Basis Capital's assets as US firms look to reduce their exposure in structured credit markets.

And the head of the US Federal Reserve, Ben Bernanke, is warning that things aren't likely to improve just yet.

BEN BERNANKE, US FEDERAL RESERVE CHAIRMAN: Financial losses have subsequently induced lenders to tighten their underwriting standards. Nevertheless rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities, problems that likely will get worse before they get better.